By Alex Salkever
Everyone's dancing now. The Apr. 4th announcement by software giant Microsoft that it will enter the online music-subscription business comes a half-note behind the Apr. 2 announcement from AOL Time Warner, EMI, and Bertelsmann that they, too, were forming such a service. And in March, Sony and Vivendi (parent of Universal Music Group) announced that they were forming an online music-subscription venture dubbed Duet.
Meanwhile, Napster refuses to die. According to digital entertainment consultancy Webnoize, Napster users downloaded 473 million tracks in the second-to-last week of March and 593 million during the last week. That was a 25% increase -- after usage dropped in February. More evidence that Napsterists are learning to cope with the court-mandated filtering of copyrighted titles.
The big announcements and Napster's positive numbers underscore that file-sharing isn't going away. Now the entire music industry is embracing a subscription-based business model. It's about time. Music is rapidly transforming from hard goods to bytes, just like software. Bytes, particularly in lots of relatively small MP3 files, are far better suited to an all-you-can-eat-for-a-fee scheme.
But simply calling a press conference and uttering the words "subscription service' hardly makes it so. All three of the new ventures have been noticeably sketchy on details. And they could all easily run aground if they fail to take customer wishes into account. Indeed, both the labels and Microsoft have a long history of failing to live up to consumer expectations.
I'm not a music or software mogul. But I am an online music lover. So here's my skeleton plan for how to make this tune a happy one for everyone. The labels should ditch any plans for heavy-handed digital rights management (DRM) systems to monitor and control what consumers do with digital music. Those plans tick off people who want control of something they buy. Further, the labels should stop fragmenting their own catalogs and work together to form channels or other content outlets organized by recognizable genres of songs. These services should be built on centralized download systems that spit out high-quality recordings over fast connections for a fee (reasonable, of course). Finally, these new ventures should allow Napster to carry on unfettered.
To music-label execs, this might sound as appetizing as the Communist Manifesto. But this prescription will give customers exactly what they want -- quality and convenience, along with the fun of Napster. Finding legitimate music on the Internet remains a frustrating exercise. Downloads from the various music-label sites remain expensive and cumbersome, in part due to the DRM coding that often crashes computers or causes other problems. Napster has made it easier. But even Napster users often get bogus downloads and poor quality, not to mention unacceptably slow connection times. Solve those problems, and users will gladly fork over cash for a system that better caters to their needs than the existing one.
The first step down this road is to forget about DRM as a way to control distribution. People who buy digital music want to download it on their desktop, burn it onto a CD so they can listen to it on the stereo or in the car, or put it in a online "music locker" so they can listen to it from any Web connection. This variability adds complexity that DRM software can't handle. "You want to be able to have some format that is open enough to work not only on your computer but on your PDA, cell phone, and your home stereo player. And you want to be able to go back to your account and download it again if your hard drive crashes," says Bob Kohn, chairman of digital music download site eMusic.com.
Fact is, DRM coding -- known as shrinkwraps -- could run afoul of existing copyright laws by interfering with the ability of scholars and others to use pieces of content in their works. Sampling content is considered a "fair use" under existing law. DRM systems also prevent consumers from reselling the right they have purchased. That could also create legal problems. "Traditionally, if I were to go buy a CD, I could then sell it to a used-CD store. With a digital rights management system, it's conceivable they won't let you sell your right to someone else," says Ira Rothken, an attorney representing several online music ventures in conflicts with big record companies.
Once the big labels drop the DRM control, they should check the industry egos at the door and recognize how customers think. While distribution in the music business is somewhat vertical, listeners sort tunes by genre and artist -- not by label. So the logical way to make it easy for customers is aggregate songs along these two specific lines and create appropriate pricing models. There need not be one universal aggregation service, either. Viewers happily subscribe to a variety of separate movie channels -- such as Cinemax, HBO, and ShowTime -- on cable TV.
SUPPLY THE OUTLETS.
Most of the labels have already done this to some degree. On their own sites, they do organize artists by genre. But that's only half the battle. Creating recognizable brand names in music-subscription services that attract customers will be necessary. And, frankly, there probably isn't enough room for 5 or 10 of them worldwide. Some analysts think the labels would be best served by funneling their music through the online entities of existing brands, such as Rolling Stone, MTV, or VH-1.
In any case, the labels should be agnostic about who gets their music to distribute via subscription. Let the consumer decide where they want to buy their music, while the labels merely supply that outlet. This will also means giving customers and third-party resellers standard MP3s and not cramming proprietary formats down their throat. MusicNet has indicated that it wants third-party companies that use its subscription-service platform to also use RealNetworks' technology. Bad move. Look at LiquidAudio's inability get off the ground with its proprietary format. How to listen to music will be market-driven, not supplier-driven.
Which brings us to Napster. "There will always be technologies that make the transfer of information more efficient. That is here to stay," says attorney Rothken. True. But Napster's strength could easily become its weakness. Its peer-to-peer architecture, which connects users directly to other users' hard drives, will never pass the corporate sniff test as a business model. Plus, users forking over money for such a service will demand better response times and more quality control.
Napster has one big advantage, though: It's a great outlet for an amazing array of music in a super-easy interface. Where else can you find bootleg copies of Miles Davis or obscure session tapes from the Dave Matthews Band?
In fact, the labels can learn more from Napster than the viability of a subscription model. Song lists of Napster users are one of the most effective collaborative filtering tools out there -- I love to try random songs on the lists of people who also like other tunes that I like. Building that system into any online music service would be a big bonus and probably not that tough to do. Amazon does it with books already by showing the shopping patterns of people who buy particular books without revealing their identity.
In short, the solution isn't to beat Napster into submission, but to incorporate it into the fold. If the big labels can offer a higher quality and higher priced service, then Napster becomes a complement rather than a competitor -- and perhaps even a channel in a bigger digital music-subscription service. As part of the deal, the labels and artists should give Napster the responsibility for creating a mechanism to repay artists.
Yes, this may all sound a tad too pat. Getting the record labels to agree on anything is tricky. Throw Bill Gates and bigfoot Microsoft into the mix, and it gets trickier still. And despite its recent entreaties to the labels, Napster could still end up as permanently damaged goods due to the court-imposed filtering.
Technological hurdles remain, too. "Connections are there, and the reliability is there. But a lot of this is still evolving and being installed. The business model is still ahead of the technology," says Gene Alvarez, an electronic business strategies analyst at consultancy MetaGroup.
But given time, I'm willing to bet that a system similar to the one I describe will emerge on its own, anyway. The Internet is a powerful force for enabling customer choice. And the big labels resist it at their own peril. The courts can shut down Napster. But they won't be able to stop the gusher of MP3s pouring out all across the Internet. The only way to deal with that is to play along.
Salkever is technology editor for BusinessWeek Online
Edited by Douglas Harbrecht